Accountants Using Forensic Data Analysis to Uncover Fraud

Accountants have been proving recently that their work can involve much more than simply crunching numbers to determine a client’s income tax return. Many of the nation’s accountants and CPAs have been engaging in what has become known as forensic accounting – using accounting skills and data analytics to uncover fraud among taxpayers. According to estimates, employee fraud is a $300 billion a year problem that until only recently has gone largely unreported.

Over the last several months, however, there have been a number of cases of accounting firms finding anomalies in tax refunds that, when examined more closely by the accountants within those firms, showed obvious instances of fraud.

One of the more notable examples occurred earlier this year during tax season when accountants at the global firm KPMG were going through the refunds issued by a national call center. They found several discrepancies in the data by using an old accounting test known as Benford’s Law which essentially states that more numbers begin with one than any other digit. The second most begin with two and then with three and so on. Benford’s Law is, of course, is more complex than just this, but this was the basic principal accountants from KPMG were able to use to find errors in the refunds issued from the call center.

What they found was a stack of tax refunds rife with fraud. The call center employees at the company in question are authorized to issue customer refunds of up to $50 without manager approval. The employees had been issuing refunds of between $30 and $40 and transferring the difference into their own bank accounts. The accountants found that more than 10,000 such fraudulent transactions were made over the course of the last few years.

The perpetrators were brought to justice as the direct result of the analytical work done by the accountants at KPMG and examples of such fraud are being uncovered by accounting professionals at an increasingly frequent rate.